The Citigroup Bailout: More Confusion

The markets hailed the fact of the Citigroup bailout, but we are just now digesting the details.  Last month Treasury bought $25 billion in preferred stock and warrants (at-the-market and equal to 10% of the value of the preferred).  Yesterday, the Treasury bought an addition $20 billion in preferred stock and warrants. The second batch of preferred stock pays an 8% dividend; the first batch pays 5% for five years and 10% thereafter.  The new batch restricts dividends on common to $.01 a share for 3 years without Treasury's consent; the old batch restricted an increase in dividends on common.  All the preferred is non-voting.  The big change is in control of executive compensation.  The new preferred requires that any compensation plans must be submitted to and approved by the "USG." The old preferred had open-ended compensation "standards" and a ban on oversized golden parachutes.  But wait.... there is something completely new... a government guarantee on a $306 billion pool of Citi's mortgage-backed securities (not 100% but with total exposure of $249 billion) in exchange for another $7 billion in preferred ($3 billion bought by the FDIC).  This new wrinkle fuels the ad hoc nature of bank bailouts and adds to market uncertainty over the bailout program.  The FDIC involvement hides a spirited debate between Paulson and Blair over the extent of FDIC exposure, an inter-agency debate that affected the final plan.  We also note with much interest that Robert Rubin, the new man behind the scenes in the Obama economic team was on the Citi board.  Who is in control here and who is making policy??? Now we wait for the new heavily negotiated, company specific bailout and wonder about transparency, standards and political power.  Wonderful way to calm the markets. 

The new bailout protects Citigroup debt and does not, yet anyway, dilute the common stock significantly.  The price of Citi common rose on the announcement.